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What happens when you sell a product or service that “kills” your customers?

Just ask recently fired Groupon CEO Andrew Mason. I don’t know that he has the answer, but I do.

Groupon was a bad idea from the start. They talk businesses into selling their goods or services for half the cost of their normal price. Of that half price that is collected, Groupon keeps half and the business keeps the last half, minus any charges for processing fees on both their cut and Groupon’s cut, which equals about 7% of the business’ portion.So let’s do the math. Groupon sells a 50% off deal to your restaurant at $20. Groupon keeps $10 for every one sold. You keep $10 minus 7%, leaving you with $9.30.

With that $9.30 collected from the customer, you have to give them $40 worth of goods or services. If you are like most restaurants, just your cost of goods on $40 eats up $10-16 (25-40%), resulting in a loss of anywhere from $.70 to $6.70 for EVERY Groupon deal sold. That’s before you calculate in additional paper products, cleaning supplies, extra staff, and lost revenue from seats that are taken away from full price customers, among other expenses.

All this turns Groupon into the single most expensive tool there is for marketing your restaurant. This a bad, bad business model. A company that promotes itself by claiming they can bring you new business ultimately ends up putting many of it’s own customers out of business, or their customers wisen up and realize Groupon is a horribly expensive way to market and they stop using the service. Either way, Groupon is cannibalizing itself and it’s customers. Groupon claims the payoff is new, regular customers for the business. The reality is that the customers are loyal to Groupon, not the business, and they follow the next deal to the next restaurant.

No business model is going to succeed long term by killing it’s customers unless it has a never ending supply of new customers. For Groupon, that means it’s hey day in the US is over. It has run it’s course here and most businesses are too smart to fall prey to it’s predatory business practices. Groupon will not rebound from it’s current woes in this market. It’s only hope is to expand into untapped markets where business owners are not aware of the dangerous effects of using Groupon. Groupon is the first daily deal model to fall because it was the first in the market. It will not be the last however.

Ultimately, nobody wins with Groupon, except the people who buy the Groupons. Check out the linked article from Yahoo Finance about the firing of Groupon CEO, Andrew Mason. If you own Groupon stock, I’m sorry for your loss, but cut your losses and dump it now. It’s not coming back.

Brandon O’Dell is an independent restaurant consultant and owner of O’Dell Restaurant Consulting, a restaurant consulting company that offers operations and marketing consulting for independent restaurants and small chains. Learn more at their website or visit their webstore to find Excel speadsheets and Word templates to help you build a better restaurant business.